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The prominent hedge fund manager William Ackman announced an ambitious and massive short trade in late December. He got on a New York stage and called Herbalife a Pyramid scheme, releasing a 300-page presentation and launching a web site explaining his view. Ackman’s short promotion managed to drive down Herbalife’s shares for a little while, but since then the shares of Herbalife have rebounded and are now more expensive than they were before Ackman stepped on that New York stage.

For hedge fund managers, shorting stocks has become increasingly tougher and hedge fund traders have become much more reluctant to bet against individual companies. This important new trend can be seen in the decrease of short interest activity in individual stocks—over 18 million shares on the New York Stock Exchange in July 2008 versus 13.3 million in October 2012—and it may help explain the poor overall performance that has hit the hedge fund industry on the whole in recent years.

Driving the reduction in hedge fund short trading is the escalating cost of selling stock short in the last few years. “Short selling has become increasingly expensive in the years subsequent to the financial crisis, thus creating added pressure for hedge fund managers,” says a recent report put out by JPMorgan’s prime brokerage unit. “Cost trends have created a strong disincentive for many managers.”

According to Sungard’s Astec Analytics, equity borrowing costs have risen by 41 basis points since 2007 in the North American stock markets. In other words, it can get really expensive for a hedge fund to borrow and sell shares it does not own in anticipation it will buy the shares after they have fallen in price. It’s not uncommon for brokers to charge more than 20% annual rates these days, which would mean a hedge fund would need a stock to drop substantially before it even starts making any money. The dividends also need to be covered. The money manager could be completely right about a stock and still lose money. The cost to borrow Facebook shares in May 2012 reached 40%, while in late 2011 the cost to short Grouponreached 100%. The shares of both companies tumbled afterwards.

Hedge fund returns have been lousy since the 2008 financial crisis, when they mostly lost money, but on average, performed much better than the stock market. Despite charging rich fees, hedge funds, on average, have been outperformed by the U.S. stock market for four straight years—with the last two years being particularly bad. There are many theories floating around about why this has happened, but the inability to short stocks at a reasonable cost has robbed hedge funds of an integral strategy that distinguishes them from other money management products like mutual funds. It may be playing a significant role in hedge fund underperformance.

Why has shorting become so expensive? JPMorgan’s prime brokerage unit gives a bunch of reasons that largely seem to be driven by today’s low interest rate environment, including rising demand for hard to borrow securities and lenders seeking higher returns by concentrating more of their lending on such shares. In addition, large beneficial owners of shares like pension funds have become more involved in their securities lending programs and are demanding higher prices for the securities they lend. Low interest rates and puny yields in the money markets mean that pension funds are receiving lower yields on their collateral pool reinvestments and hedge funds are, as a result, receiving diminishes rebates, boosting shorting costs. JPMorgan also points to new rules by securities regulators to limit naked short selling.

How much is it costing Ackman's Pershing Square hedge fund to short Herbalife? Lots of people would like to know. Robert Chapman, whose Chapman Capital has taken a sizeable long position in Herbalife’s stock since Ackman announced his short trade, is estimating it could cost 25% to bet against Herbalife for an entire year. Even if Ackman has obtained better pricing, the stock is already up substantially so far in 2013. This is risky business. You can see why many hedge funds would rather avoid it.